UNEXPECTED TAX

Nelson Evening Mail, Volume LXVI, 30 April 1934, Page 6

UNEXPECTED TAX

LOAN CONVERSION SEQUEL PREMIUM HELD TO BE INCOME NEW SOURCE OF REVENUE LEVY ON BONDHOLDERS Taxpayers who hold Government bonds will find a new and disturbing feature in the forms for return of income for income tax purposes now being circulated. This is that premiums resulting from the Government’s loan conversion of last year are regarded as income. „ , ~ On the “instructional page ot tlie form the following paragraph appears: “Premiums payable in of loans converted under the New land Debt Conversion Act, 1932-33 are liable for income tax and should be shown in Part Co (b). If in respect of free-of-tax loans the premium should be shown in Part A.” The meaning of this is that m cases where the bonds were, and aic, taxable the premium is to be regarded as taxable income; in cases where the bonds were tax free the amount of the premium must be included in the income tax return, and though it will not be taxed it will be used, in the same way as the income from taxfree bonds is used, to fix the rate of j tax applicable to the holder s taxable income.

ADDITION OF THE PREMIUM

The circumstances of last year's loan conversion are well remembered. All Government bonds held in New Zealand were subjected to a reduction of interest of 20 per cent. New bonds were issued, bearing interest at uniform rates of 4 per cent for taxable bonds and 34 per cent for tax-free bonds-. Where this involved a reduction of interest greater tht 20 per cent the bondholder was compensated by a “premium” in the form of an additional bond. There were premiums on all tax-free bonds because the reduction of interest from 44 per cent to 34 per cent was more than 20 per cent by 2s per £IOO bond. The amount of the premium varied with the maturity date of the loan. It was really a compounding of the above 2s for the remaining period of the original loan. Thus 193 G maturities got os 7d and 1941 maturities 13s 7d per £IOO. 'faxable loans were treated in the same way. Five per cents and under were convertible at par. All over f> per cent got premiums at varying rates, according to the interest previously paid and the maturity dates.

UNEMPLOYMENT TAX QUESTION

Forms for the return of income for unemployment tax purposes are also in circulation. There*is nothing in them to show that the above interpretation is being applied, but as the same rulings generally hold in both cases it would not be" surprising if the Unemployment Board is also looking for Is in the pound out of the premiums on bond conversion. In this case the tax, if claimed, would he payable on all premiums, including the premiums on tax-free bonds. The “N.Z. Herald” points out that individual tax-pavers who hold Government bonds may tlms be caught both ways. Companies, are concerned only as income tax payers; but those with large holdings of Government bonds may find the tax heavy. So far as local body conversions are concerned many of these are now being carried through and the question of taxation of the premiums could not arise until next year unless the transaction was completed prior .to 31st March last. It is to be noted that quite a number of local bodies arc paying premiums in cash. This was not. sa in the Government conversion. Boiids of £7) and upward were issued for the premiums and only fractions of £5 were payable in cash.